Prospectus
Supplement
Filed
Pursuant to Rule 424(b)(5)
File
No. 333-149223
PROSPECTUS
SUPPLEMENT
(to Prospectus dated
February 26, 2008)
38,500 Shares
COMMON STOCK
We are
offering 38,500 shares of our common stock upon the exercise of outstanding
warrants. Our common stock is listed on the NASDAQ Capital Market under the
symbol “OCLS.” On February 1, 2010, the last reported sale price for our common
stock on the NASDAQ Capital Market was $1.90 per share.
Investing in our securities involves
a high degree of risk. Before buying any of our securities, you should carefully
consider the risk factors described in “Risk Factors” beginning on page S-2 of
this Prospectus Supplement.
The date
of this Prospectus Supplement is February 2, 2010
TABLE
OF CONTENTS
Prospectus
Supplement
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Page
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About
This Prospectus Supplement
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ii
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Prospectus
Supplement Summary
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S-1
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Risk
Factors
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S-2
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Forward-Looking
Statements
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S-13
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Use
of Proceeds
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S-13
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Plan
of Distribution
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S-13
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Experts
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S-14
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Where
You Can Find More Information
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S-14
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Prospectus
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Page
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About
This Prospectus
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2
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Risk
Factors
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2
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Our
Company
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2
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Forward-Looking
Statements
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3
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Use
of Proceeds
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3
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Description
of Preferred Stock
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3
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Description
of Depositary Shares
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4
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Description
of Common Stock
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5
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Description
of Warrants
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7
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Plan
of Distribution
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8
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Legal
Matters
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9
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Experts
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9
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Where
You Can Find More Information
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9
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In this prospectus supplement and
the accompanying prospectus, unless otherwise indicated, the terms Oculus, “we,”
“us,” “our,” and similar terms refer to Oculus Innovative Sciences, Inc. and its
subsidiaries on a consolidated basis.
i
ABOUT THIS PROSPECTUS
SUPPLEMENT
This
prospectus supplement and the accompanying prospectus are part of a “shelf”
registration statement on Form S-3 that we filed with the Securities and
Exchange Commission on February 26, 2008. This prospectus supplement
describes the specific details regarding this offering, including the amount of
common stock being offered and the risks of investing in our common stock. The
accompanying prospectus provides more general information, some of which may not
apply to our common stock. You should read both this prospectus supplement and
the accompanying prospectus together with the additional information about us
described in the section entitled “Where You Can Find More
Information.”
If
information contained in this prospectus supplement is inconsistent with the
accompanying prospectus, you should rely on this prospectus
supplement.
ii
PROSPECTUS SUPPLEMENT
SUMMARY
This summary contains basic
information about us and this offering. Because it is a summary, it does not
contain all of the information that you should consider before investing. Before
you decide to invest in our common stock, you should read this entire prospectus
supplement and the accompanying prospectus carefully, including the section
entitled “Risk Factors,” and our consolidated financial statements and the
related notes and other documents incorporated by reference in the accompanying
prospectus.
OUR COMPANY
We
incorporated under the laws of the State of California in April 1999 as
Micromed Laboratories, Inc. In August 2001, we changed our name to Oculus
Innovative Sciences, Inc. and later reincorporated under the laws of the State
of Delaware in December 2006. We conduct our business worldwide, with
significant operating subsidiaries in Europe and Mexico, and references to our
Company contained in this prospectus supplement include our subsidiaries, Oculus
Technologies of Mexico, S.A. de C.V., Oculus Innovative Sciences Netherlands,
B.V. and Oculus Innovative Sciences Japan, K.K, except where the context
otherwise requires. Our principal executive offices are located at 1129 North
McDowell Boulevard, Petaluma, California 94954. Our telephone number is (707)
782-0792. Our fiscal year end is March 31. Our website is www.oculusis.com.
Information contained on our website does not constitute part of this prospectus
supplement.
We
develop, manufacture and market a family of products intended to prevent and
treat infections in chronic and acute wounds. Our platform technology, called
Microcyn®, is a
proprietary solution of electrically charged oxychlorine small molecules
designed to treat a wide range of organisms that cause disease (pathogens).
These include viruses, fungi, spores and antibiotic-resistant strains of
bacteria, such as Methicillin-resistant Staphylococcus aureus, or
MRSA, and Vancomycin-resistant Enterococcus, or VRE, in
wounds.
We do not
have the necessary regulatory approvals to market Microcyn in the United States
as a drug. In the United States our device product does, however, have five
clearances as a 510(k) medical device. We do not have the necessary regulatory
clearance or approval to market Microcyn in the U.S. as a medical device for an
antimicrobial or wound healing indication. In the future we expect to apply with
the FDA for clearance as an antimicrobial in a liquid and a gel form and as
conducive to wound healing via a 510(k) medical clearance. Outside the United
States our product has a CE Mark device approval in Europe for debriding,
irrigating and moistening acute and chronic wounds in comprehensive wound
treatment by reducing microbial load and creating moist environment. In Mexico
we are approved as a drug as antiseptic treatment of wounds and infected areas.
In India our product has a drug license for cleaning and debriding in wound
management while in China there is a medical device approval by the State Food
and Drug Administration, or SFDA, for reducing the propagation of microbes in
wounds and creating a moist environment for wound healing.
THE OFFERING
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Common
stock offered by Oculus
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Up
to 38,500 shares
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Common
stock to be outstanding after this offering
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Up
to 24,941,075 shares, based on 24,902,575 shares issued and outstanding as
of January 29, 2010.
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Use
of proceeds
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We
will not receive proceeds from the issuance of the shares. See “Use of
Proceeds.”
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Risk
factors
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See
the “Risk Factors” section of this prospectus for factors to consider
before deciding to purchase our securities.
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NASDAQ
Capital Market symbol
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OCLS
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S-1
RISK FACTORS
Risks Related to Our
Business
We have a history
of losses, we expect to continue to incur losses and we may never achieve
profitability.
We
incurred a net loss of $1,893,000 for the three months ended September 30,
2009. At September 30, 2009, our accumulated deficit amounted to
$114,239,000. During the three months ended September 30, 2009, net cash
used in operating activities amounted to $3,355,000. At September 30, 2009,
our working capital amounted to $6,373,000. We may need to raise additional
capital from external sources. We expect to continue incurring losses for the
foreseeable future and may raise additional capital to pursue product
development initiatives and penetrate markets for the sale of our products. We
may not raise additional capital. We believe that we have access to capital
resources through possible public or private equity offerings, debt financings,
corporate collaborations or other means. If the economic climate in the U.S.
does not improve or continues to deteriorate, our ability to raise additional
capital could be negatively impacted. If we are unable to secure additional
capital, we may be required to curtail our research and development initiatives
and take additional measures to reduce costs in order to conserve
cash.
Declining general
economic or business conditions may have a negative impact on our
business.
Concerns
over inflation, energy costs, geopolitical issues, the availability and cost of
credit, the U.S. mortgage market and a declining real estate market in the U.S.
have contributed to increased volatility and diminished expectations for the
global economy and expectations of slower global economic growth going forward.
These factors, combined with volatile oil prices, declining business and
consumer confidence and increased unemployment, have precipitated a global
economic slowdown. If the economic climate in the U.S. does not improve or
continues to deteriorate, our business, including our patient population, our
suppliers and our third-party payors, could be negatively affected, resulting in
a negative impact on our business.
Our inability to
raise additional capital on acceptable terms in the future may cause us to
curtail certain operational activities, including regulatory trials, sales and
marketing, and international operations, in order to reduce costs and sustain
the business, and would have a material adverse effect on our business and
financial condition.
We expect
capital outlays and operating expenditures to increase over the next several
years as we work to conduct regulatory trials commercialize our products and
expand our infrastructure. We have entered into debt financing arrangements
which are secured by all of our assets. We may need to raise additional capital
to, among other things:
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fund
our clinical trials and preclinical
studies;
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sustain
commercialization of our current products or new
products;
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expand
our manufacturing capabilities;
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increase
our sales and marketing efforts to drive market adoption and address
competitive developments;
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acquire
or license technologies; and
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finance
capital expenditures and our general and administrative
expenses.
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Our
present and future funding requirements will depend on many factors,
including:
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the
progress and timing of our clinical
trials;
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the
level of research and development investment required to maintain and
improve our technology
position;
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S-2
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cost
of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights;
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our
efforts to acquire or license complementary technologies or acquire
complementary businesses;
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changes
in product development plans needed to address any difficulties in
commercialization;
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competing
technological and market developments;
and
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changes
in regulatory policies or laws that affect our
operations.
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If we
raise additional funds by issuing equity securities, dilution to our
stockholders could result. Any equity securities issued also may provide for
rights, preferences or privileges senior to those of holders of our common
stock. If we raise additional funds by issuing debt securities, these debt
securities would have rights, preferences and privileges senior to those of
holders of our common stock, and the terms of the debt securities issued could
impose significant restrictions on our operations. If we raise additional funds
through collaborations and licensing arrangements, we might be required to
relinquish significant rights to our technologies or products, or grant licenses
on terms that are not favorable to us. A failure to obtain adequate funds may
cause us to postpone or curtail certain operational activities, including
regulatory trials, sales and marketing, and international operations, in order
to reduce costs and sustain the business, and would have a material adverse
effect on our business and financial condition.
We do not have
the necessary regulatory approvals to market Microcyn as a drug in the United
States.
We have
obtained five 510(k) clearances in the United States that permit us to sell
Microcyn as a medical device to clean, moisten and debride wounds. Before we are
permitted to sell Microcyn as a drug in the United States, we must, among other
things, successfully complete additional preclinical studies and well-controlled
clinical trials, submit a New Drug Application, or NDA, to the FDA and obtain
FDA approval.
The FDA
approval process is expensive and uncertain, requires detailed and comprehensive
scientific and other data and generally takes several years. Despite the time
and expense exerted, approval is never guaranteed. Even if we obtain FDA
approval to sell Microcyn as a drug, we may not be able to successfully
commercialize Microcyn as a drug in the United States and may never recover the
substantial costs we have invested in the development of our Microcyn
products.
Delays or adverse
results in clinical trials could result in increased costs to us and delay our
ability to generate revenue.
Clinical
trials can be long and expensive, and the outcomes of clinical trials are
uncertain and subject to delays. It may take several years to complete clinical
trials, if at all, and a product candidate may fail at any stage of the clinical
trial process. The length of time required varies substantially according to the
type, complexity, novelty and intended use of the product candidate. Interim
results of a preclinical study or clinical trial do not necessarily predict
final results, and acceptable results in preclinical studies or early clinical
trials may not be repeatable in later subsequent clinical trials. The
commencement or completion of any of our clinical trials may be delayed or
halted for a variety of reasons, including the following:
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insufficient
funds to continue our clinical
trials;
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the
FDA requirements for approval, including requirements for testing efficacy
or safety, may change;
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the
FDA or other regulatory authorities do not approve a clinical trial
protocol;
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S-3
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patients
do not enroll in clinical trials at the rate we
expect;
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delays
in reaching agreement on acceptable clinical trial agreement terms with
prospective sites;
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delays
in obtaining institutional review board approval to conduct a study at a
prospective site;
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third
party clinical investigators do not perform our clinical trials on our
anticipated schedule or consistent with the clinical trial protocol and
good clinical practices, or the third party organizations do not perform
data collection and analysis in a timely or accurate manner;
and
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governmental
regulations or administrative actions are
changed.
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We do not
know whether future clinical trials will demonstrate safety and efficacy
sufficiently to result in additional FDA approvals. While a number of physicians
have conducted clinical studies assessing the safety and efficacy of Microcyn
for various indications, the data from these studies is not sufficient to
support approval of Microcyn as a drug in the United States.
The FDA
and other regulatory bodies may also change standards and acceptable trial
procedures required for a showing of safety and efficacy. For example, until
recently, the FDA accepted non-inferiority clinical trials, or clinical trials
that show that a new treatment is equivalent to standard treatment, as the
standard for anti-infective drug approvals. On October 12, 2007, the FDA
released draft guidance entitled Antibacterial Drug Products: Use of
Noninferiority Studies to Support Approval. This new agency guidance requires
either placebo-controlled or superiority trial designs, which are designed to
test whether, and to what extent, a new treatment is better than the placebo.
The uncertainty of clinical trial protocols and changes within FDA guidelines
could have a negative impact on the timelines and milestones for our clinical
program.
If we fail to
obtain, or experience significant delays in obtaining, additional regulatory
clearances or approvals to market our current or future products, we may be
unable to commercialize these products.
Developing,
testing, manufacturing, marketing and selling of medical technology products are
subject to extensive regulation by numerous governmental authorities in the
United States and other countries. The process of obtaining regulatory clearance
and approval of medical technology products is costly and time consuming. Even
though the underlying product formulation may be the same or similar, our
products are subject to different regulations and approval processes depending
upon their intended use.
To obtain
regulatory approval of our products as drugs in the United States, we must first
show that our products are safe and effective for target indications through
preclinical studies (laboratory and animal testing) and clinical trials (human
testing). The FDA generally clears marketing of a medical device through the
510(k) pre-market clearance process if it is demonstrated that the new product
has the same intended use and the same or similar technological characteristics
as another legally marketed Class II device, such as a device already
cleared by the FDA through the 510(k) premarket notification process, and
otherwise meets the FDA’s requirements. Product modifications, including
labeling the product for a new intended use, may require the submission of a new
510(k) clearance and FDA approval before the modified product can be
marketed.
The
outcomes of clinical trials are inherently uncertain. In addition, we do not
know whether the necessary approvals or clearances will be granted or delayed
for future products. The FDA could request additional information, changes to
formulation or clinical testing that could adversely affect the time to market
and sale of products as drugs. If we do not obtain the requisite regulatory
clearances and approvals, we will be unable to commercialize our products as
drugs or devices and may never recover any of the substantial costs we have
invested in the development of Microcyn.
Distribution
of our products outside the United States is subject to extensive government
regulation. These regulations, including the requirements for approvals or
clearance to market, the time required for regulatory review and the sanctions
imposed for violations, vary from country to country. We do not know whether we
will obtain regulatory approvals in such countries or that we will not be
required to incur significant costs in obtaining or maintaining these regulatory
approvals. In addition, the export by us of certain of our products that have
not yet been cleared for domestic commercial distribution may be subject to FDA
export restrictions. Failure to obtain necessary regulatory approvals, the
restriction, suspension or revocation of existing approvals or any other failure
to comply with regulatory requirements would have a material adverse effect on
our future business, financial condition, and results of
operations.
S-4
If our products
do not gain market acceptance, our business will suffer because we might not be
able to fund future operations.
A number
of factors may affect the market acceptance of our products or any other
products we develop or acquire, including, among others:
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the
price of our products relative to other treatments for the same or similar
treatments;
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the
perception by patients, physicians and other members of the health care
community of the effectiveness and safety of our products for their
indicated applications and
treatments;
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our
ability to fund our sales and marketing efforts;
and
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the
effectiveness of our sales and marketing
efforts.
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If our
products do not gain market acceptance, we may not be able to fund future
operations, including developing, testing and obtaining regulatory approval for
new product candidates and expanding our sales and marketing efforts for our
approved products, which would cause our business to suffer.
If our
competitors develop products similar to Microcyn, we may need to modify or alter
our business strategy, which may delay the achievement of our
goals.
Competitors
may develop products with similar characteristics as Microcyn. Such similar
products marketed by larger competitors can hinder our efforts to penetrate the
market. As a result, we may be forced to modify or alter our business and
regulatory strategy and sales and marketing plans, as a response to changes in
the market, competition and technology limitations, among others. Such
modifications may pose additional delays in achieving our goals.
We intend to
license or collaborate with third parties in various potential markets, and
events involving these strategic partners or any future collaborations could
delay or prevent us from developing or commercializing
products.
Our
business strategy and our short- and long-term operating results will depend in
part on our ability to execute on existing strategic collaborations and to
license or partner with new strategic partners. We believe collaborations allow
us to leverage our resources and technologies and to access markets that are
compatible with our own core areas of expertise while avoiding the cost of
establishing or maintaining a direct sales force in each market. We may incur
significant costs in the use of third parties to identify and assist in
establishing relationships with potential collaborators.
To
penetrate our target markets, we may need to enter into additional collaborative
agreements to assist in the development and commercialization of products. For
example, depending upon our analysis of the time and expense involved in
obtaining FDA approval to sell a product to treat open wounds, we may choose to
license our technology to a third party as opposed to pursuing commercialization
ourselves. Establishing strategic collaborations is difficult and
time-consuming. Potential collaborators may reject collaborations based upon
their assessment of our financial, regulatory or intellectual property position
and our internal capabilities. Our discussions with potential collaborators may
not lead to the establishment of new
collaborations
on favorable terms and may have the potential to provide collaborators with
access to our key intellectual property filings and next generation formations.
We have limited control over the amount and timing of resources that our current
collaborators or any future collaborators devote to our collaborations or
potential products. These collaborators may breach or terminate their agreements
with us or otherwise fail to conduct their collaborative activities successfully
and in a timely manner. Further, our collaborators may not develop or
commercialize products that arise out of our collaborative arrangements or
devote sufficient resources to the development, manufacture, marketing or sale
of these products. By entering into a collaboration, we may preclude
opportunities to collaborate with other third parties who do not wish to
associate with our existing third party strategic partners. Moreover, in the
event of termination of a collaboration agreement, termination negotiations may
result in less favorable terms.
If we are unable
to expand our direct domestic sales force, we may not be able to successfully
sell our products in the United States.
We have
very limited commercialization capability and make Microcyn-based products
available primarily through our website, and several regional distributors. We
plan for a more aggressive commercialization and product launch in the event we
obtain drug approval from the FDA or obtain other clearance or approval with
wound healing claims. Developing a sales force is expensive and time consuming,
and the lack of qualified sales personnel could delay or limit the success of
our product launch. Our domestic sales force, if established, will be competing
with the sales operations of our competitors, which are better funded and more
experienced. We may not be able to develop domestic sales capacity on a timely
basis or at all.
S-5
Our dependence on
distributors for sales could limit or prevent us from selling our products and
from realizing long-term revenue growth.
We
currently depend on distributors to sell Microcyn in the United States, Europe
and other countries and intend to continue to sell our products primarily
through distributors in Europe and the United States for the foreseeable future.
If we are unable to expand our direct sales force, we will continue to rely on
distributors to sell Microcyn. Our existing distribution agreements are
generally short-term in duration, and we may need to pursue alternate
distributors if the other parties to these agreements terminate or elect not to
renew their agreements. If we are unable to retain our current distributors for
any reason, we must replace them with alternate distributors experienced in
supplying the wound care market, which could be time-consuming and divert
management’s attention from other operational matters. In addition, we will need
to attract additional distributors to expand the geographic areas in which we
sell Microcyn. Distributors may not commit the necessary resources to market and
sell our products to the level of our expectations, which could harm our ability
to generate revenues. In addition, some of our distributors may also sell
products that compete with ours. In some countries, regulatory licenses must be
held by residents of the country. For example, the regulatory approval for one
product in India is owned and held by our Indian distributor. If the licenses
are not in our name or under our control, we might not have the power to ensure
their ongoing effectiveness and use by us. If current or future distributors do
not perform adequately, or we are unable to locate distributors in particular
geographic areas, we may not realize long-term revenue growth.
If we fail to
comply with ongoing regulatory requirements, or if we experience unanticipated
problems with our products, these products could be subject to restrictions or
withdrawal from the market.
Regulatory
approvals or clearances that we currently have and that we may receive in the
future are subject to limitations on the indicated uses for which the products
may be marketed, and any future approvals could contain requirements for
potentially costly post-marketing follow-up studies. If the FDA determines that
our promotional materials or activities constitute promotion of an unapproved
use or we otherwise fail to comply with FDA regulations, we may be subject to
regulatory enforcement actions, including a warning letter, injunction, seizure,
civil fine or criminal penalties. In addition, the manufacturing, labeling,
packaging, adverse event reporting, storage, advertising, promotion,
distribution and record-keeping for approved products are subject to extensive
regulation. Our manufacturing facilities, processes and specifications are
subject to periodic inspection by the FDA, European and other regulatory
authorities and from time to time, we may receive notices of deficiencies from
these agencies as a result of such inspections. Our failure to continue to meet
regulatory standards or to remedy any deficiencies could result in restrictions
being imposed on products or manufacturing processes, fines, suspension or loss
of regulatory approvals or clearances, product recalls, termination of
distribution or product seizures or the need to invest substantial resources to
comply with various existing and new requirements. In the more egregious cases,
criminal sanctions, civil penalties, disgorgement of profits or closure of our
manufacturing facilities are possible. The subsequent discovery of previously
unknown problems with Microcyn, including adverse events of unanticipated
severity or frequency, may result in restrictions on the marketing of our
products, and could include voluntary or mandatory recall or withdrawal of
products from the market.
New
government regulations may be enacted and changes in FDA policies and
regulations, their interpretation and enforcement, could prevent or delay
regulatory approval of our products. We cannot predict the likelihood, nature or
extent of adverse government regulation that may arise from future legislation
or administrative action, either in the United States or abroad. Therefore, we
do not know whether we will be able to continue to comply with any regulations
or that the costs of such compliance will not have a material adverse effect on
our future business, financial condition, and results of operations. If we are
not able to maintain regulatory compliance, we will not be permitted to market
our products and our business would suffer.
We may experience
difficulties in manufacturing Microcyn, which could prevent us from
commercializing one or more of our products.
The
machines used to manufacture our Microcyn-based products are complex, use
complicated software and must be monitored by highly trained engineers. Slight
deviations anywhere in our manufacturing process, including quality control,
labeling and packaging, could lead to a failure to meet the specifications
required by the FDA, the EPA, European notified bodies, Mexican regulatory
agencies and other foreign regulatory bodies, which may result in lot failures
or product recalls. If we are unable to obtain quality internal and external
components, mechanical and electrical parts, if our software contains defects or
is corrupted, or if we are unable to attract and retain qualified technicians to
manufacture our products, our manufacturing output of Microcyn, or any other
product candidate based on our platform that we may develop, could fail to meet
required standards, our regulatory approvals could be delayed, denied or
revoked, and commercialization of one or more of our Microcyn-based products may
be delayed or foregone. Manufacturing processes that are used to produce the
smaller quantities of Microcyn needed for clinical tests and current commercial
sales may not be successfully scaled up to allow production of significant
commercial quantities. Any failure to manufacture our products to required
standards on a commercial scale could result in reduced revenues, delays in
generating revenue and increased costs.
S-6
Our competitive
position depends on our ability to protect our intellectual property and our
proprietary technologies.
Our
ability to compete and to achieve and maintain profitability depends on our
ability to protect our intellectual property and proprietary technologies. We
currently rely on a combination of patents, patent applications, trademarks,
trade secret laws, confidentiality agreements, license agreements and invention
assignment agreements to protect our intellectual property rights. We also rely
upon unpatented know-how and continuing technological innovation to develop and
maintain our competitive position. These measures may not be adequate to
safeguard our Microcyn technology. In addition, we granted a security interest
in our assets, including our intellectual property, under a loan and security
agreement. If we do not protect our rights adequately, third parties could use
our technology, and our ability to compete in the market would be
reduced.
Although
we have filed U.S. and foreign patent applications related to our Microcyn based
products, the manufacturing technology for making the products, and their uses,
only one U.S. patent has been issued from these applications to date. Our
pending patent applications and any patent applications we may file in the
future may not result in issued patents, and we do not know whether any of our
in-licensed patents or any additional patents that might ultimately be issued by
the U.S. Patent and Trademark Office or foreign regulatory body will protect our
Microcyn technology. Any claims that issue may not be sufficiently broad to
prevent third parties from producing competing substitutes and may be infringed,
designed around, or invalidated by third parties. Even issued patents may later
be found to be invalid, or may be modified or revoked in proceedings instituted
by third parties before various patent offices or in courts. For example, a
competitor filed a Notice of Opposition with the Opposition Division of the
European Patent Office in February 2008 opposing our recently issued
European patent.
The
degree of future protection for our proprietary rights is more uncertain in part
because legal means afford only limited protection and may not adequately
protect our rights, and we will not be able to ensure that:
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we
were the first to invent the inventions described in patent
applications;
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we
were the first to file patent applications for
inventions;
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others
will not independently develop similar or alternative technologies or
duplicate our products without infringing our intellectual property
rights;
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any
patents licensed or issued to us will provide us with any competitive
advantages;
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we
will develop proprietary technologies that are patentable;
or
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the
patents of others will not have an adverse effect on our ability to do
business.
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The
policies we use to protect our trade secrets may not be effective in preventing
misappropriation of our trade secrets by others. In addition, confidentiality
and invention assignment agreements executed by our employees, consultants and
advisors may not be enforceable or may not provide meaningful protection for our
trade secrets or other proprietary information in the event of unauthorized use
or disclosures. We cannot be certain that the steps we have taken will prevent
the misappropriation and use of our intellectual property in the United States,
or in foreign countries where the laws may not protect our proprietary rights as
fully as in the United States.
S-7
We may face
intellectual property infringement claims that could be time-consuming, costly
to defend and could result in our loss of significant rights and, in the case of
patent infringement claims, the assessment of treble
damages.
On
occasion, we may receive notices of claims of infringement, misappropriation or
misuse of other parties’ proprietary rights. We may have disputes regarding
intellectual property rights with the parties that have licensed those rights to
us. We may also initiate claims to defend our intellectual property.
Intellectual property litigation, regardless of outcome, is expensive and
time-consuming, could divert management’s attention from our business and have a
material negative effect on our business, operating results or financial
condition. In addition, the outcome of such litigation may be unpredictable. If
there is a successful claim of infringement against us, we may be required to
pay substantial damages (including treble damages if we were to be found to have
willfully infringed a third party’s patent) to the party claiming infringement,
develop non-infringing technology, stop selling our products or using technology
that contains the allegedly infringing intellectual property or enter into
royalty or license agreements that may not be available on acceptable or
commercially practical terms, if at all. Our failure to develop non-infringing
technologies or license the proprietary rights on a timely basis could harm our
business. In addition, modifying our products to exclude infringing technologies
could require us to seek re-approval or clearance from various regulatory bodies
for our products, which would be costly and time consuming. Also, we may be
unaware of pending patent applications that relate to our technology. Parties
making infringement claims on future issued patents may be able to obtain an
injunction that would prevent us from selling our products or using technology
that contains the allegedly infringing intellectual property, which could harm
our business.
Our ability to
generate revenue will be diminished if we are unable to obtain acceptable prices
or an adequate level of reimbursement from third-party payors of healthcare
costs.
The
continuing efforts of governmental and other third-party payors, including
managed care organizations such as health maintenance organizations, or HMOs, to
contain or reduce costs of health care may affect our future revenue and
profitability, and the future revenue and profitability of our potential
customers, suppliers and collaborative or license partners and the availability
of capital. For example, in certain foreign markets, pricing or profitability of
prescription pharmaceuticals is subject to government control. In the United
States, governmental and private payors have limited the growth of health care
costs through price regulation or controls, competitive pricing programs and
drug rebate programs. Our ability to commercialize our products successfully
will depend in part on the extent to which appropriate coverage and
reimbursement levels for the cost of our Microcyn products and related treatment
are obtained from governmental authorities, private health insurers and other
organizations, such as HMOs.
There is
significant uncertainty concerning third-party coverage and reimbursement of
newly approved medical products and drugs. Third-party payors are increasingly
challenging the prices charged for medical products and services. Also, the
trend toward managed healthcare in the United States and the concurrent growth
of organizations such as HMOs, as well as legislative proposals to reform
healthcare or reduce government insurance programs, may result in lower prices
for or rejection of our products. The cost containment measures that health care
payors and providers are instituting and the effect of any health care reform
could materially and adversely affect our ability to generate
revenues.
In
addition, given ongoing federal and state government initiatives directed at
lowering the total cost of health care, the United States Congress and state
legislatures will likely continue to focus on health care reform, the cost of
prescription pharmaceuticals and the reform of the Medicare and Medicaid payment
systems. While we cannot predict whether any proposed cost-containment measures
will be adopted, the announcement or adoption of these proposals could reduce
the price that we receive for our Microcyn products in the future.
We could be
required to indemnify third parties for alleged infringement, which could cause
us to incur significant costs.
Some of
our distribution agreements contain commitments to indemnify our distributors
against liability arising from infringement of third party intellectual property
such as patents. We may be required to indemnify our customers for claims made
against them or license fees they are required to pay. If we are forced to
indemnify for claims or to pay license fees, our business and financial
condition could be substantially harmed.
A significant
part of our business is conducted outside of the United States, exposing us to
additional risks that may not exist in the United States, which in turn could
cause our business and operating results to suffer.
We have
international operations in Mexico and Europe. During the years ended
March 31, 2009 and 2008, approximately 76% and 70% of our total revenues,
respectively, were generated from sales outside of the United States. Our
business is highly regulated for the use, marketing and manufacturing of our
Microcyn products both domestically and internationally. Our international
operations are subject to risks, including:
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local
political or economic instability;
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changes
in governmental regulation;
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changes
in import/export duties;
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trade
restrictions;
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lack
of experience in foreign
markets;
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S-8
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difficulties
and costs of staffing and managing operations in certain foreign
countries;
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work
stoppages or other changes in labor
conditions;
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difficulties
in collecting accounts receivables on a timely basis or at all;
and
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adverse
tax consequences or overlapping tax
structures.
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We plan
to continue to market and sell our products internationally to respond to
customer requirements and market opportunities. We currently have international
manufacturing facilities in Mexico and the Netherlands. Establishing operations
in any foreign country or region presents risks such as those described above as
well as risks specific to the particular country or region. In addition, until a
payment history is established over time with customers in a new geography or
region, the likelihood of collecting receivables generated by such operations
could be less than our expectations. As a result, there is a greater risk that
reserves set with respect to the collection of such receivables may be
inadequate. If our operations in any foreign country are unsuccessful, we could
incur significant losses and we may not achieve profitability.
In
addition, changes in policies or laws of the United States or foreign
governments resulting in, among other things, changes in regulations and the
approval process, higher taxation, currency conversion limitations, restrictions
on fund transfers or the expropriation of private enterprises, could reduce the
anticipated benefits of our international expansion. If we fail to realize the
anticipated revenue growth of our future international operations, our business
and operating results could suffer.
Our sales in
international markets subject us to foreign currency exchange and other risks
and costs which could harm our business.
A
substantial portion of our revenues are derived from outside the United States;
primarily from Mexico. We anticipate that revenues from international customers
will continue to represent a substantial portion of our revenues for the
foreseeable future. Because we generate revenues in foreign currencies, we are
subject to the effects of exchange rate fluctuations. The functional currency of
our Mexican subsidiary is the Mexican Peso, and the functional currency of our
subsidiary in the Netherlands is the Euro. For the preparation of our
consolidated financial statements, the financial results of our foreign
subsidiaries are translated into U.S. dollars on average exchange rates during
the applicable period. If the U.S. dollar appreciates against the Mexican Peso
or the Euro, as applicable, the revenues we recognize from sales by our
subsidiaries will be adversely impacted. Foreign exchange gains or losses as a
result of exchange rate fluctuations in any given period could harm our
operating results and negatively impact our revenues. Additionally, if the
effective price of our products were to increase as a result of fluctuations in
foreign currency exchange rates, demand for our products could decline and
adversely affect our results of operations and financial condition.
The loss of key
members of our senior management team, one of our directors or our inability to
retain highly skilled scientists, technicians and salespeople could adversely
affect our business.
Our
success depends largely on the skills, experience and performance of key members
of our executive management team, including Hojabr Alimi, our Chief Executive
Officer and Robert Northey, our Director of Research and Development. The
efforts of these people will be critical to us as we continue to develop our
products and attempt to commercialize products in the chronic and acute wound
care market. If we were to lose one or more of these individuals, we may
experience difficulties in competing effectively, developing our technologies
and implementing our business strategies.
Our
research and development programs depend on our ability to attract and retain
highly skilled scientists and technicians. We may not be able to attract or
retain qualified scientists and technicians in the future due to the intense
competition for qualified personnel among medical technology businesses,
particularly in the San Francisco Bay Area. We also face competition from
universities and public and private research institutions in recruiting and
retaining highly qualified personnel. In addition, our success depends on our
ability to attract and retain salespeople with extensive experience in wound
care and close relationships with the medical community, including physicians
and other medical staff. We may have difficulties locating, recruiting or
retaining qualified salespeople, which could cause a delay or decline in the
rate of adoption of our products. If we are not able to attract and retain the
necessary personnel to accomplish our business objectives, we may experience
constraints that will adversely affect our ability to support our research,
development and sales programs.
We
maintain key-person life insurance only on Mr. Alimi. We may discontinue
this insurance in the future, it may not continue to be available on
commercially reasonable terms or, if continued, it may prove inadequate to
compensate us for the loss of Mr. Alimi’s services.
S-9
The wound care
industry is highly competitive and subject to rapid technological change. If our
competitors are better able to develop and market products that are less
expensive or more effective than any products that we may develop, our
commercial opportunity will be reduced or eliminated.
Our
success depends, in part, upon our ability to stay at the forefront of
technological change and maintain a competitive position. We compete with large
healthcare, pharmaceutical and biotechnology companies, along with smaller or
early-stage companies that have collaborative arrangements with larger
pharmaceutical companies, academic institutions, government agencies and other
public and private research organizations. Many of our competitors have
significantly greater financial resources and expertise in research and
development, manufacturing, pre-clinical testing, conducting clinical trials,
obtaining regulatory approvals and marketing approved products than we do. Our
competitors may:
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develop
and patent processes or products earlier than we
will;
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develop
and commercialize products that are less expensive or more efficient than
any products that we may develop;
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obtain
regulatory approvals for competing products more rapidly than we will;
and
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improve
upon existing technological approaches or develop new or different
approaches that render our technology or products obsolete or
non-competitive.
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As a
result, we may not be able to successfully commercialize any future
products.
The success of
our research and development efforts may depend on our ability to find suitable
collaborators to fully exploit our capabilities. If we are unable to establish
collaborations or if these future collaborations are unsuccessful, our research
and development efforts may be unsuccessful, which could adversely affect our
results of operations and financial condition.
An
important element of our business strategy will be to enter into collaborative
or license arrangements under which we license our Microcyn technology to other
parties for development and commercialization. We expect that while we may
initially seek to conduct initial clinical trials on our drug candidates, we may
need to seek collaborators for our drug candidates and for a number of our
potential products because of the expense, effort and expertise required to
conduct additional clinical trials and further develop those potential product
candidates. Because collaboration arrangements are complex to negotiate, we may
not be successful in our attempts to establish these arrangements. If we need
third party assistance in identifying and negotiating one or more acceptable
arrangements, it might be costly. Also, we may not have products that are
desirable to other parties, or we may be unwilling to license a potential
product because the party interested in it is a competitor. The terms of any
arrangements that we establish may not be favorable to us.
Alternatively,
potential collaborators may decide against entering into an agreement with us
because of our financial, regulatory or intellectual property position or for
scientific, commercial or other reasons. If we are not able to establish
collaborative agreements, we may not be able to develop and commercialize new
products, which would adversely affect our business and our
revenues.
In order
for any of these collaboration or license arrangements to be successful, we must
first identify potential collaborators or licensees whose capabilities
complement and integrate well with ours. We may rely on these arrangements for
not only financial resources, but also for expertise or economies of scale that
we expect to need in the future relating to clinical trials, manufacturing,
sales and marketing, and for licenses to technology rights. However, it is
likely that we will not be able to control the amount and timing or resources
that our collaborators or licensees devote to our programs or potential
products. If our collaborators or licensees prove difficult to work with, are
less skilled than we originally expected, or do not devote adequate resources to
the program, the relationship will not be successful. If a business combination
involving a collaborator or licensee and a third party were to occur, the effect
could be to diminish, terminate or cause delays in development of a potential
product.
S-10
If we are unable
to comply with broad and complex federal and state fraud and abuse laws,
including state and federal anti-kickback laws, we could face substantial
penalties and our products could be excluded from government healthcare
programs.
We are
subject to various federal and state laws pertaining to healthcare fraud and
abuse, which include, among other things, “anti-kickback” laws that prohibit
payments to induce the referral of products and services, and “false claims”
statutes that prohibit the fraudulent billing of federal healthcare programs.
Our operations are subject to the Federal Anti-Kickback Statute, a criminal
statute that, subject to certain statutory exceptions, prohibits any person from
knowingly and willfully offering, paying, soliciting or receiving remuneration,
directly or indirectly, to induce or reward a person either (i) for
referring an individual for the furnishing of items or services for which
payment may be made in whole or in part by a government healthcare program such
as Medicare or Medicaid, or (ii) for purchasing, leasing, or ordering or
arranging for or recommending the purchasing, leasing or ordering of an item or
service for which payment may be made under a government healthcare program.
Because of the breadth of the federal anti-kickback statute, the Office of
Inspector General of the U.S. Department of Health and Human Services, or the
OIG, was authorized to adopt regulations setting forth additional exceptions to
the prohibitions of the statute commonly known as “safe harbors.” If all of the
elements of an applicable safe harbor are fully satisfied, an arrangement will
not be subject to prosecution under the federal anti-kickback
statute.
In
addition, if there is a change in law, regulation or administrative or judicial
interpretations of these laws, we may have to change our business practices or
our existing business practices could be challenged as unlawful, which could
have a negative effect on our business, financial condition and results of
operations.
Healthcare
fraud and abuse laws are complex, and even minor, inadvertent irregularities can
potentially give rise to claims that a statute or regulation has been violated.
The frequency of suits to enforce these laws have increased significantly in
recent years and have increased the risk that a healthcare company will have to
defend a false claim action, pay fines or be excluded from the Medicare,
Medicaid or other federal and state healthcare programs as a result of an
investigation arising out of such action. We cannot assure you that we will not
become subject to such litigation. Any violations of these laws, or any action
against us for violation of these laws, even if we successfully defend against
it, could harm our reputation, be costly to defend and divert management’s
attention from other aspects of our business. Similarly, if the physicians or
other providers or entities with whom we do business are found to have violated
abuse laws, they may be subject to sanctions, which could also have a negative
impact on us.
Our efforts to
discover and develop potential products may not lead to the discovery,
development, commercialization or marketing of actual drug
products.
We are
currently engaged in a number of different approaches to discover and develop
new product applications and product candidates. At the present time, we have
one Microcyn-based drug candidate in clinical trials. We also have a
non-Microcyn-based compound in the research and development phase. We believe
this compound has potential applications in oncology. Discovery and development
of potential drug candidates are expensive and time-consuming, and we do not
know if our efforts will lead to discovery of any drug candidates that can be
successfully developed and marketed. If our efforts do not lead to the discovery
of a suitable drug candidate, we may be unable to grow our clinical pipeline or
we may be unable to enter into agreements with collaborators who are willing to
develop our drug candidates.
We must implement
additional and expensive finance and accounting systems, procedures and controls
to accommodate growth of our business and organization and to satisfy public
company reporting requirements, which will increase our costs and require
additional management resources.
As a
public reporting company, we are required to comply with the Sarbanes-Oxley Act
of 2002 and the related rules and regulations of the Securities and Exchange
Commission, or the Commission. Section 404 of the Sarbanes-Oxley Act of
2002, or Section 404, requires our management to perform an annual
assessment of our internal control over financial reporting. Compliance with
Section 404 and other requirements of doing business as a public company
have and will continue to increase our costs and require additional management
resources to implement an ongoing program to perform system and process
evaluation and testing of our internal controls. In the past, we entered into
transactions that resulted in accounting consequences that we did not identify
at the time of the transactions. As a result, our prior independent auditors
informed us that we did not have the appropriate financial management and
reporting structure in place to meet the demands of a public company and that
our accounting and financial personnel lacked the appropriate level of
accounting knowledge, experience and training. In calendar year 2006, our
current independent auditors recommended certain changes which, in addition to
other changes in our financial reporting and management structure, have been
implemented at additional cost. We have upgraded our accounting systems,
procedures and controls and will need to continue to implement additional
finance and accounting systems, procedures and controls as we grow our business
and organization, enter into complex business transactions and take actions
designed to satisfy reporting requirements. As of our second report on Form
10-K, our management concluded that our internal controls were adequate to meet
the required Section 404 assessment. If we are unable to complete the
required Section 404 assessment as to adequacy of our internal control over
financial reporting in future Form 10-K filings, our ability to obtain
additional financing could be impaired. In addition, investors could lose
confidence in the reliability of our internal control over financial reporting
and in the accuracy of our periodic reports filed under the Securities Exchange
Act of 1934. A lack of investor confidence in the reliability and accuracy of
our public reporting could cause our stock price to decline.
S-11
We may not be
able to maintain sufficient product liability insurance to cover claims against
us.
Product
liability insurance for the healthcare industry is generally expensive to the
extent it is available at all. We may not be able to maintain such insurance on
acceptable terms or be able to secure increased coverage if the
commercialization of our products progresses, nor can we be sure that existing
or future claims against us will be covered by our product liability insurance.
Moreover, the existing coverage of our insurance policy or any rights of
indemnification and contribution that we may have may not be sufficient to
offset existing or future claims. A successful claim against us with respect to
uninsured liabilities or in excess of insurance coverage and not subject to any
indemnification or contribution could have a material adverse effect on our
future business, financial condition, and results of operations.
Risks Related to Our Common
Stock
Our operating
results may fluctuate, which could cause our stock price to
decrease.
Fluctuations
in our operating results may lead to fluctuations, including declines, in our
share price. Our operating results and our share price may fluctuate from period
to period due to a variety of factors, including:
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demand
by physicians, other medical staff and patients for our Microcyn
products;
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reimbursement
decisions by third-party payors and announcements of those
decisions;
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clinical
trial results and publication of results in peer-reviewed journals or the
presentation at medical
conferences;
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the
inclusion or exclusion of our Microcyn products in large clinical trials
conducted by others;
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actual
and anticipated fluctuations in our quarterly financial and operating
results;
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developments
or disputes concerning our intellectual property or other proprietary
rights;
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issues
in manufacturing our product candidates or
products;
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new
or less expensive products and services or new technology introduced or
offered by our competitors or us;
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the
development and commercialization of product
enhancements;
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changes
in the regulatory environment;
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delays
in establishing new strategic
relationships;
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costs
associated with collaborations and new product
candidates;
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introduction
of technological innovations or new commercial products by us or our
competitors;
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litigation
or public concern about the safety of our product candidates or
products;
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changes
in recommendations of securities analysts or lack of analyst
coverage;
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failure
to meet analyst expectations regarding our operating
results;
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additions
or departures of key personnel; and
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general
market conditions.
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Variations
in the timing of our future revenues and expenses could also cause significant
fluctuations in our operating results from period to period and may result in
unanticipated earning shortfalls or losses. In addition, the NASDAQ Capital
Market, in general, and the market for life sciences companies, in particular,
have experienced significant price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of those
companies.
S-12